Mortgage Rates: Know Your Options

There are several different kinds of mortgages, each with their own specific rates and terms. To make sure that you get the best possible mortgage loan to fit your specific financial needs, it’s important to learn about these different types of mortgage rates so that you’ll understand your options and make a smart financial move. This brief overview will help you understand some of the most common types of mortgage rates. You’ll learn what to expect get some helpful guidelines for the mortgage process.

Variable Rate Mortgage

The variable rate mortgage is very common. These rates are designed to fluctuate with changes in the economy and national interest rates. They rise and drop over the years to stay competitive with current interest rates. Depending on the loan agreement that you have, a variable rate mortgage can change every year, or sometimes multiple times per year. Variable rate mortgages can allow you to take advantage of drops in national mortgage rates, but you may have to weather the increased rates as well.

Fixed Rate Mortgage

Fixed rate mortgages are also very common. These loans feature a single interest rate that does not change. Regardless of whether national interest rates rise or fall, you will be paying the same amount of interest for the entire life of the loan. This can be a great option when you find a good deal on a low interest rate, as it will protect you against future increases in interest rates. Unfortunately, if mortgage rates drop significantly, then you will still be locked into the higher interest rate on your loan.

Split Rate Mortgage

Split rate mortgages are not as common as fixed rate and variable rate mortgages, at least in part because they can be a bit more difficult for consumers to understand. A split rate mortgage carries two different interest rates on the same loan; one portion of the loan will feature a fixed interest rate, while the other portion will have a variable interest rate.

The split can range from an even 50/50 split between the two rates to a 60/40 or 75/25 split. While repaying your loan you will likely be paying against the larger portion of the split first (though this will depend largely on the specifics of your loan agreement), and then will experience a change in interest rate as your loan switches over to the other rate.

Combination Rate Mortgage

Similar to split rate mortgages, combination rate mortgages combine both fixed and variable rates on a single loan. Instead of having a specific percentage of the loan that is fixed and another percentage that is variable, though, combination rate loans feature a fixed rate for a certain period of time and then transition to a variable rate that can change yearly.

The most common durations for the fixed portions of a combination rate mortgage are three years, five years, and seven years, though some lenders may offer additional fixed rate timeframes as well.

The following video provides important mortgate rate information that's easy to understand:

Capped Rate Mortgage

A mortgage with a capped rate is similar to a fixed rate mortgage, though it offers a limited range of variation so that you can take limited advantage of fluctuations in the mortgage market. A capped rate mortgage features a minimum and a maximum cap on the interest rate of the loan, allowing the interest rate to change within that range in much the same way as if the mortgage had a variable interest rate. Many capped rate mortgages also require that a certain portion of each month’s interest be paid as a part of the monthly payment.

Introductory Rate Mortgage

Introductory rate mortgages are designed as an incentive for those who are shopping for a loan. These loans offer a lower rate for the first six months to the first year of the mortgage. Some of the introductory rates that are offered on loans can be significantly lower than you would be able to find as a standard rate, allowing you to pay a larger portion of your loan principal during the first portion of repayment.

It’s important to understand that once the introductory rate expires, there will be a significant increase in the interest rate that you will be paying on your loan.

Taking out a mortgage is a huge financial decision that can directly impact your long term and short term lifestyle. It’s important to understand all of your options, weigh the pros and cons, and consider what your financial goals are down the road.

It can be tremendously helpful to seek the guidance of a financial advisor or a professional online resource when choosing between mortgage rates. With a little foresight and planning, and the right information, you can select the mortgage rate that’s best for you.